BILL ANALYSIS                                                                                                                                                                                                    Ó




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          |SENATE RULES COMMITTEE            |                        SB 150|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
          |327-4478                          |                              |
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                                   THIRD READING 


          Bill No:  SB 150
          Author:   Nguyen (R) and Huff (R)
          Amended:  6/22/15  
          Vote:     21  

           SENATE GOVERNANCE & FIN. COMMITTEE:  6-0, 7/1/15
           AYES:  Hertzberg, Nguyen, Beall, Lara, Moorlach, Pavley
           NO VOTE RECORDED:  Hernandez

           SENATE APPROPRIATIONS COMMITTEE:  7-0, 8/27/15
           AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen
            
           SUBJECT:   Personal Income Tax Law: exclusion: student loan  
                     debt forgiveness


          SOURCE:    Author

          DIGEST:   This bill excludes from gross income loan amounts  
          discharged from a for-profit college when the borrower is unable  
          to complete a program of study.

          ANALYSIS: 
          
          Existing Law:

          1)Provides that "gross income" includes all income from whatever  
            source derived, including compensation for services, business  
            income, gains from property, interest, dividends, rents, and  
            royalties, unless specifically excluded.

          2)Provides that debt that is forgiven or cancelled by a lender  
            is generally treated as income on a tax return, and  
            consequently is taxable.









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          3)Provides that in the case of an individual, gross income does  
            not include any amount which would be included by reason of  
            discharge of any student debt if such discharge was pursuant  
            to a provision of such loan under which all or part of the  
            indebtedness of the individual would be discharged if the  
            individual worked for a certain period of time in certain  
            professions for any of a broad class of employers.

          4)Excludes loan amounts repaid or canceled by the United States  
            Secretary of Education from gross income under state law.  

          This bill:

          1)Provides an exclusion from California gross income for income  
            that would otherwise result from a forgiven student loan, as  
            defined, of an eligible individual.

          2)Provides an individual would be an eligible individual for a  
            taxable year if any of the following apply during the taxable  
            year:

                 The individual is granted a discharge pursuant to the  
               agreement between ECMC Group, Inc., Zenith Education Group,  
               and the Consumer Financial Protection Bureau concerning the  
               purchase of certain assets of Corinthian Colleges, Inc.,  
               dated February 2, 2015;
                 The individual is granted a discharge pursuant to  
               Paragraph 23 of the William D. Ford Federal Direct Loan  
               Program Borrower's Rights and Responsibilities Statement  
               because of either of the following:
                 The individual could not complete a program of study  
               because the school closed; or 
                 The individual successfully asserts that the school did  
               something wrong or failed to do something that it should  
               have done; or
                 The individual attended a Corinthian Colleges, Inc.,  
               school on or before May 1, 2015, is granted a discharge of  
               any student loan made in connection with attending that  
               school, and that discharge is not excludable from gross  
               income as a result of the reasons listed in 1 or 2, above.

          Comments








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          1)Author's statement.  According to the author, "Following the  
            closure of 107 Corinthian College campuses, many former  
            students are now seeking a partial or full discharge of their  
            student loan debt.  Unfortunately, if their debt is cancelled,  
            discharged, or forgiven, that debt may be subject to state  
            (and federal) income tax.  To aid these students, Senate Bill  
            150 removes tax liability on forgiven federal loan debt for  
            students who choose to forgo the credits that they earned.   
            Nearly 13,000 California students are unable to complete their  
            degrees but are still being held responsible for the student  
            loan debt they incurred.  These students have devoted time,  
            energy, and resources in an effort to improve both their  
            education and overall lives.  Already victimized by the  
            closure of the college, they should not be forced to forgo the  
            credits they earned while also being subjected to tax debt.   
            SB 150 helps students whose educational career is in limbo  
            through no fault of their own to continue their education  
            without being penalized financially."

          2)How did we get here?  Founded in 1995, Corinthian's for-profit  
            colleges once included over 100 campuses across the country,  
            where over 100,000 students were enrolled.  A bachelor's  
            degree from a Corinthian college could cost as much as  
            $75,000.  The vast majority of the school's revenue came from  
            federal student loans, but federal loans are unable to cover  
            all of the tuition, so students often had to take out private  
            loans.  The Consumer Financial Protection Bureau alleges that  
            Corinthian kept tuition high in order to force students to  
            borrow from the college at higher rates.  The Corinthian loans  
            came with origination fees of 6% and interest rates of around  
            15%, as of 2011, much higher than the 3% and 7% interest on  
            federal student loans.  Corinthian was a longtime target for  
            federal and state regulators, with a host of investigations  
            and lawsuits charging falsified placement rates, deceptive  
            marketing, and predatory recruiting, targeting the most  
            vulnerable low-income students.

            Since last July, the Department of Education has forced the  
            company to close or sell off its locations over concerns about  
            its high interest loans and misleading employment statistics.   
            In February of this year, Corinthian announced that students  








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            would get $480 million in loan forgiveness under an agreement  
            with federal regulators.  Under the agreement, Corinthian  
            would sell the majority of their campuses to the nonprofit  
            ECMC Group, and students who attended ECMC Group campuses saw  
            an immediate 40% reduction in the amount they owed on their  
            private loans provided by Corinthian.  The Department of  
            Education also fined Corinthian $30 million for 947  
            representations of placement rates, findings that Corinthian  
            disputed.  Corinthian did not sell its Heald College campuses,  
            located mostly in California, and they remained open until  
            April 25, when they closed on a day's notice, leaving 16,000  
            students unable to complete their degree.  

            Under federal law, students have a right to debt relief if  
            they were enrolled at the time their college closed, or up to  
            120 days before the shutdown.  The Department of Education  
            extended that eligibility window for Heald students, allowing  
            them to have their debts discharged if they withdrew any time  
            after June 2014, when the department and Corinthian agreed to  
            the sell the colleges.  The Department of Education estimates  
            that about 40,000 Heald students would be eligible for $544  
            million in debt relief if every student sought relief.  In the  
            past, only 6 percent of students whose colleges closed asked  
            for their debt to be discharged.  The Department of Education  
            also estimates that if all 350,000 former Corinthian students  
            over the last five years applied for and received the debt  
            relief, that cost alone could be as much as $3.5 billion.

          3)Reverse conformity.  California law does not automatically  
            conform to changes to federal tax law, except under specified  
            circumstances.  Instead, the Legislature must affirmatively  
            conform to federal changes.  Generally, when the federal  
            government changes its tax laws, California catches up by  
            enacting its own legislation the following year to reduce  
            differences between the two codes, thereby easing the tax  
            preparation burden on taxpayers, tax preparers, and the  
            Franchise Tax Board.  Currently, loans forgiven prior to the  
            completion of a loan repayment program are included as taxable  
            income under state law.  If SB 150 becomes law, taxpayers  
            would exclude from income the forgiven loan for state tax  
            purposes, but include it for federal tax purposes, bringing  
            California further out of compliance with federal law.  








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          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No


          According to the Senate Appropriations Committee, the Franchise  
          Tax Board (FTB) estimates that the bill would result in General  
          Fund revenue losses of $34 million in 2015-16, and $100,000 in  
          both 2016-17 and 2017-18. The bill would not significantly  
          impact the department's costs.




          SUPPORT:   (Verified8/27/15)


          California Community Colleges Chancellor's Office
          State Board of Equalization Vice Chair, George Runner 


          OPPOSITION:   (Verified8/27/15)


          None received


          ARGUMENTS IN SUPPORT:     The supporters of this bill argue that  
          this bill will protect students who would incur a financial  
          hardship from having to pay taxes on phantom income earned as a  
          result of student loan debt forgiveness.  Also, supporters argue  
          this bill will help California students affected by the massive  
          closure of Corinthian Colleges by granting relief on the state  
          portion of their tax obligation.

          Prepared by:Myriam Bouaziz / GOV. & F. / (916) 651-4119
          8/31/15 17:00:56


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